Asher Rubinstein published in Indus Business Journal regarding IRS crackdown on Offshore Accounts in India

Asher Rubinstein published in Indus Business Journal regarding IRS crackdown on Offshore Accounts in India

Asher’s article, “IRS Ramps up Focus on Offshore India Accounts” was published in Indus Business Journal in March, 2011

INDUS BUSINESS JOURNAL

IRS Ramps Up Focus on Offshore India Accounts

By Asher Rubinstein

Following the 2009 U.S. prosecution of Swiss bank UBS, the Internal Revenue Service is now targeting other banks in jurisdictions beyond Switzerland. Bank accounts in India appear to be one of the next targets. People with undeclared accounts in India should take action in the face of the IRS crackdown on offshore accounts that are not tax compliant.

Since the summer of 2010, HSBC has been the target of a criminal tax fraud investigation by the U.S. Department of Justice, for facilitating non-compliant offshore accounts. In the summer of 2010, DOJ sent letters to HSBC foreign account holders, advising them that they are the subjects of criminal investigations relating to unreported accounts in India and Singapore. DOJ has also prosecuted a Virginia surgeon and two Miami Beach real estate developers for undeclared foreign accounts with HSBC.

There are also reports that HSBC is implicated in the recent criminal prosecution of Vaibhav Dahake, an Indian-American with undeclared accounts in India and the British Virgin Islands. While the criminal indictment against Dahake does not mention HSBC by name, it alleges that an “unidentified bank” operated a division called “NRI Services” which specifically marketed foreign banking services to Americans of Indian decent. According to the allegations in the indictment, the bank advised that accounts be opened in India because of higher interest rates, no requirement of U.S. tax forms or social security numbers, and no taxation in India. Interestingly, the indictment details transactions with a total value of less than $200,000. This suggests that the U.S. government is sending a message that all noncompliant foreign accounts, large and small alike, are vulnerable to investigation and prosecution.

It was the substantial U.S. presence of UBS, and now HSBC, that made such banks vulnerable to U.S. prosecution. With U.S. banking licenses, multiple branches within the United States, thousands of employees in the United States, and billions of dollars of assets in the United States, these banks are clearly within the jurisdiction of a U.S. court and susceptible to an adverse court judgment or order.

As alleged in the indictment against Vaibhav Dahake, HSBC is reported to have specifically targeted Indian-American clients and offered offshore banking services in India and Singapore. The HSBC-India connection represents a particular tangent of offshore banking that will surely warrant scrutiny. Whereas UBS advised American clients that their accounts may be subject to exposure to the IRS, and therefore suggested pre-emptive disclosure (such as voluntarily disclosing to the IRS and correcting a non-compliant foreign account prior to the IRS taking action), Americans with accounts at HSBC in India received letters from DOJ in 2010, making it clear that DOJ already had their names. In such a case, pre-emptive disclosure is impossible; the IRS will reject a voluntary disclosure if the taxpayer is already under investigation or if the IRS already has the taxpayer’s name (regardless of the source, such as an audit, a whistle blower or an investigation).

The IRS has opened or will soon open field offices in Panama, Australia and China. Tax Information Exchange Agreements have been signed by all the former “tax havens,” including Liechtenstein and Monaco.

Another way for the IRS to obtain a taxpayer’s offshore banking data is via an internal bank employee stealing confidential data and offering it to a governmental tax authority in return for money. In 2008, a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold the data to the German intelligence service in return for millions of Euros. With that data, the German government prosecuted many prominent Germans for tax fraud. The German government also shared the data with other governments around the world, including, apparently, India.

The stolen LGT bank data has now formed the basis for Indian authorities to launch prosecutions of Indian citizens who had undeclared accounts outside of India.

The LGT information is almost certainly in the possession of the IRS as well.

In 2010, India signed a tax information exchange treaty with Switzerland, and India is in the process of negotiating tax treaties with 65 countries, including “tax havens” such as the Cayman Islands, Jersey, Monaco, the British Virgin Islands and the Isle of Man. While there is currently no tax treaty between India and Liechtenstein.

Clearly, against this background of the erosion of banking secrecy and cooperation amongst governments in sharing banking data, taxpayers with undeclared accounts in India must consider bringing such accounts into compliance.

In early February 2011, the IRS announced the Offshore Voluntary Disclosure Initiative, which closely mirrors the 2009 Offshore Voluntary Disclosure Program, with a few refinements. The new penalties are 25 percent, greater than the 20 percent penalty under prior regulations, yet less than the 50 percent penalty that the IRS has been imposing in recent criminal tax fraud prosecutions.

The new voluntary disclosure rules present an opportunity for taxpayers with foreign accounts, in India and elsewhere, who did not come forward under prior regulations, but still want to avoid criminal prosecution and bring their foreign accounts into compliance. It is clear that the IRS is moving past UBS and Switzerland to other banks in other countries, and India appears to be a particular focus. Taxpayers must bring non-compliant foreign accounts into tax compliance, in order to avoid discovery by the IRS, higher penalties and criminal prosecution. In this new era of international transparency, decreased banking secrecy and stronger enforcement efforts, offshore banking compliance is very highly recommended.

Asher Rubinstein is a principal at the law firm of Rubinstein & Rubinstein LLP in New York City. His practice concentration is asset protection, wealth preservation, tax planning and tax compliance. He may be reached at www.assetlawyer.com.